Top Menu

Sunday, January 31, 2016

China Factory Gauge Signals a Record Streak of Deterioration. (video) China’s official factory gauge signaled conditions deteriorated for a
sixth month as an index of services continued to hold up, illustrating
the widening divergence in the two-speed economy. The purchasing
managers index dropped to a three-year low of 49.4 in January, the
National Bureau of Statistics said Monday. That compared with a median
estimate of 49.6 in a Bloomberg survey of economists, and represents the
longest stretch of readings remaining below 50 on record. Numbers below
50 indicate deterioration.

China's Efforts to Squeeze Bets Against the Yuan Haven't Achieved Much. The cost of betting against the yuan in Hong Kong is back to where it
was at the start of the year, highlighting the shortcomings of China’s
attempt to starve the offshore market of funds while flooding domestic
banks with cash to support the economy. The Hong Kong InterBank
Offered Rate for three-month yuan loans fell to 4.87 percent on Friday,
59 basis points lower than the Dec. 31 fixing and down from a record
10.42 percent on Jan. 12. The comparable rate in Shanghai is 3.10
percent and Chris Morrison at $965 million hedge fund Omni Partners says
funds will flow offshore, providing a pool of yuan to be borrowed and
sold, unless China imposes draconian capital controls.

China Bears Miss Worst Selloff Since 2008 After Cutting Short Bets. Talk about mistimed trading: Bears on Chinese equities just missed the biggest sell-off in seven years. Short sellers abandoned their bearish bets against the biggest A-share ETF listed in the U.S. just as mainland stocks tumbled the most in January since the global financial crisis. Shares
borrowed and sold on expectations of a decline in the exchange-traded
fund fell to a one-year low of 4.2 percent of stock outstanding on Jan.
11, down from a record of 38 percent on Dec. 9, according to data
compiled by Bloomberg and Markit. The trades were unwound as the fund,
which tracks the CSI 300 Index of companies traded in Shanghai and
Shenzhen, lost as much as 28 percent from a peak in late 2015 through
last week.

BOJ Rate Cut No Solace for Top Japan Fund That's Staying in Cash. J Flag Investment Co., an investment advisory firm which helps run among the top five funds
in Japan, says the Bank of Japan’s move to negative interest rates won’t
assuage investor anxiety or damp volatility in the nation’s stocks. The
firm, which advises on 25 billion yen ($210.8 million) in assets,
boosted cash last year and has no plans to get back in the market
because it expects stocks to remain volatile over the next three to six
months even after the central bank lowered its interest rates to minus
0.1 percent on certain holdings. J Flag’s long-only fund rose 24 percent
in 2015, the fourth best-performing fund among 26 Japan-focused peers
tracked by Eurekahedge Pte.

HSBC Says Hiring, Salaries to Be Frozen in 2016 in Cost-Cut Plan. HSBC Holdings Plc will impose a hiring and pay freeze this year as
part of its drive to cut as much as $5 billion in costs by the end of
2017, a spokeswoman for the bank said Sunday. The actions were
outlined in a memorandum received by employees on Friday, the bank’s
Gillian James said in an e-mail statement. “As flagged in our Investor
Update we have targeted significant cost reductions by the end of 2017,”
James said. HSBC
Chief Executive Officer Stuart Gulliver in June outlined a three-year
plan to pare back a sprawling global network by shutting money-losing
businesses and eliminating jobs as he pushes to improve earnings amid
surging compliance costs. Other major European lenders from Credit
Suisse Group AG to Deutsche Bank AG are cutting thousands of jobs as
they battle to adapt to tougher regulatory demands on capital.

Korean Won Weakens Most in Three Weeks as Export Outlook Worsens. The won suffered its biggest drop in three weeks after South Korea’s
exports shrank the most since August 2009 and the yen’s slide worsened
the outlook for shipments. Government bonds rose, pushing yields
to record lows, after official data on Monday showed overseas
sales contracted 18.5 percent in January from a year earlier, more than
the median estimate for a 10.3 percent decline in a Bloomberg survey.
The yen weakened after the Bank of Japan adopted negative interest rates
on Friday, boosting the competitiveness of Japanese goods. The two
nations compete in global markets to sell everything from cars to
electronics. The won weakened 0.5 percent to 1,205.38 a dollar as
of 10:47 a.m. in Seoul, data compiled by Bloomberg show. It fell as much
as 1 percent, the most since Jan. 11, and is Asia’s worst performer
this year with a 2.7 percent loss.

Gulf Arab Stocks Trim Worst Start in 10 Years After Oil Rebounds. Gulf Arab equities trimmed their worst January in at least a decade after oil capped its second weekly advance. Dubai’s
DFM General Index led gains in the region, climbing to the highest in
more than three weeks as the number of shares traded was almost double
the six-month average. Abu Dhabi’s ADX General Index had the biggest
increase in more than a year. Saudi Arabia’s Tadawul All Share Index
rose a fourth day, the longest streak since November. The Bloomberg GCC 200 Index, a gauge of 200 of the region’s biggest
companies, added 2.1 percent, gaining for a third day. The measure has
lost 9.2 percent this month, the worst start to a year since the index
was created 10 years ago.

Asian Stocks Advance for Fourth Day Amid Central Bank Optimism. Asian stocks rose, with the regional benchmark index heading for its
fourth day of advances, as shares in Tokyo extended Friday’s rally after
the Bank of Japan stepped up its monetary stimulus. The MSCI Asia
Pacific Index gained 0.4 percent to 121.82 as of 9:05 a.m. in Tokyo.

Oil Declines as Kuwait to Nigeria Boost OPEC Crude Production. Oil halted its longest run of gains this year as Kuwait and Nigeria
helped boost crude production from OPEC, exacerbating a global glut. Futures
lost as much as 1.7 percent in New York after earlier rising as much as
1.7 percent. Output from the Organization of Petroleum Exporting
Countries climbed to 33.11 million barrels a day in January as Iran
pumped a further 60,000 barrels a day, according to data compiled by
Bloomberg. China’s purchasing managers index dropped to 49.4 in January,
the National Bureau of Statistics said Monday. Numbers below 50
indicate deterioration.

BofA Says Sharp Yuan Devaluation Will Depress Commodity Prices. A depreciation of 1 percent in the Chinese yuan leads to a decline of
0.6 percent in commodity prices, according to Bank of America Corp. This
relationship with the currency is the strongest for commodities such as
copper and platinum, of which China is the world’s dominant consumer,
the U.S. bank’s strategists wrote in a report dated Jan. 25. A cheaper
yuan will erode the purchasing power of the Chinese, pushing prices down
and outweighing any benefit from easier financial conditions that a
devaluation may bring, they said.

Oil-Price Poker: Why the Saudis Won’t Fold ‘Em. Don’t underestimate the impact of Middle East politics. The game being played in the global oil market today bears more than a
passing resemblance to poker. Nobody wants to quit while they’re
losing. That is important for investors to keep in mind as they
ponder what have become almost daily spikes and drops in the price of
crude. So, too, is the role of Saudi Arabia in the game.

Trump and the Obama Power Temptation. A history of using lawsuits or government to silence critics and rivals raises the question: How would he behave in office? Of all the Republicans campaigning in Iowa, perhaps none is campaigning
harder than Ben Sasse, a Republican senator from Nebraska. Mr. Sasse
isn’t running for president. He’s running against Donald Trump. The
particular focus of his opposition deserves a lot more attention.

Medals for U.S. Humiliation. Iran honors the commanders who captured U.S. sailors. In other news from the receding tide of war, the Ayatollah Ali
Khamenei has given medals to the Iranian Revolutionary Guards who
recently captured and humiliated American sailors. Iran state
media reported Sunday that the Supreme Leader had awarded the Fath, or
Victory, medal to the head of the Revolutionary Guards navy and four
commanders who were involved in seizing two U.S. Navy boats in January.
The two patrol boats were seized after they somehow entered Iran’s
territorial waters. The Pentagon hasn’t publicly...

‘This was all planned’: Former IG says Hillary, State Dept. are lying. The State Department is lying when it says it didn’t know until it was
too late that Hillary Clinton was improperly using personal e-mails and a
private server to conduct official business — because it never set up
an agency e-mail address for her in the first place, the department’s
former top watchdog says. “This was all planned in advance” to skirt rules governing federal
records management, said Howard J. Krongard, who served as the agency’s
inspector general from 2005 to 2008.

Mid-tier Chinese banks piling up trillions of dollars in shadow loans. Mid-tier Chinese
banks are increasingly using complex instruments to make new loans and
restructure existing loans that are then shown as low-risk investments
on their balance sheets, masking the scale and risks of their lending to
China's slowing economy. The
size of this 'shadow loan' book rose by a third in the first half of
2015 to an estimated $1.8 trillion, equivalent to 16.5 percent of all
commercial loans in China, a UBS analysis shows. For smaller banks, the
rate is much faster.

Moody's sees higher costs for Australian banks on mining downturn. Ratings agency Moody's Investors
Service said on Monday it expects credit costs to increase
"moderately" for Australian banks as a deep downturn in the
resources sector aggravates macroeconomic risks. Moody's said regions and sectors most exposed to mining are
starting to see some signs of stress and while Australian banks'
direct exposure to the resources sector was relatively low, they
faced "high second-order risks".

Financial Times:

Gilead(GILD) risks becoming victim of its own success. During
the past two years, Gilead, a California-based drugmaker, has emerged
as the undisputed leader of the four large US biotech companies. Its hepatitis C medicines, Harvoni and Sovaldi, set a new record for the most successful drug launch, thanks in part to a contentious price tag that works out at roughly $1,000 per pill.

The Times of India:

ISIS Yazidi sex slaves subjected to traumatic 'virginity tests' after escaping. Yazidi women and girls who manage to escape ISIS after being captured as
sex slaves have been undergoing traumatic "virginity tests" to prove
they were abused. Human Rights Watch interviewed victims who
survived organised rape, captivity and forced marriage only to be
subjected to the "abusive" examinations after believing they had reached
safety in Iraqi Kurdistan. Rothna Begum, a researcher at the
group's women's rights division, said she spoke to a woman called Luna
who had been kidnapped by ISIS as the group swept through northern Iraq
in 2014, sold four times and raped by all her "owners". She was
one of hundreds of Yazidi women and girls believed to have since
undergone painful "virginity tests" as a method of proving the rapes to
Iraqi officials documenting ISIS crimes.

Personal Income for December is estimated to rise +.2% versus a +.3% gain in November.

Personal Spending for December is estimated to rise +.1% versus a +.3% gain in November.

Real Personal Spending for December is estimated to rise +.1% versus a +.3% gain in November.

The PCE Core MoM for December is estimated to rise +.1% versus a +.1% gain in November.

9:45 am EST

Final Markit US Manufacturing PMI for January is estimated at 52.7 versus a prior estimate of 52.7.

10:00 am EST

ISM Manufacturing for January is estimated to rise to 48.4 versus 48.2 in December.

ISM Prices Paid for January is estimated to rise to 35.0 versus 33.5 in December.

Construction Spending MoM for December is estimated to rise +.6% versus a -.4% decline in November.

Upcoming Splits

(AFSI) 2-for-1

Other Potential Market Movers

The Bank of Australia rate decision and the Eurozone PMI report could also impact trading today.

BOTTOM LINE: Asian indices are mostly lower, weighed down by financial
and industrial shares in the region. I expect US stocks to open
modestly higher and to weaken into the afternoon, finishing mixed. The
Portfolio is 50% net long heading into the week.

Saturday, January 30, 2016

Trauma Lingers as Stocks' Worst January Since 2009 Incites Angst. (video) Maybe the best thing you can say about the worst January for stocks
in seven years is that an excess of optimism won’t be a problem for
equities in 2016. Even with the Standard & Poor’s 500 Index’s
rebound in the final two weeks, it wasn’t enough to reverse a selloff
that at its lowest point erased $2.5 trillion from American shares. It
could’ve been worse. After tumbling to a 21-month low, the
benchmark ended the month with its biggest one-day rally since September
to trim the monthly loss to 5.1 percent. “The question is: Do we get it all washed out in January and then move
on, or is it a harbinger of doom to come? I don’t know if I have a great
answer either way,” Gina Martin Adams, equity strategist at Wells Fargo
Securities LLC, said by phone. “A significant portion of upside equity
returns usually do happen in November, December and January, so to lose
the performance in January puts pressure on later this year.”

BOJ Shock Heralds Currency War Return as Yen Drops Most in Year. (video) The yen dropped the most in more than a year after Bank of Japan
Governor Haruhiko Kuroda unexpectedly adopted negative interest rates,
risking another round of competitive devaluations. The currency
fell against all 16 of its major peers after Japan’s central bank voted
5-4 to apply an interest rate of minus 0.1 percent to current accounts
held at the central bank. The surprise move prompted Morgan Stanley to
remove its yen trading strategies for now, according to a research note
from the bank.

Russia’s Great Shift Downward. Putin has shown little interest in changing the economic model. For Russia’s battered economy, 2016 already looks miserable. The ruble
has slumped to record lows as oil prices have fallen 11 percent since
Jan. 1, to around $30 a barrel. The government, which gets nearly half
its revenue from oil and gas, is scrambling to plug a 1.5 trillion-ruble
($19.2 billion) hole in its budget. The International Monetary Fund
forecasts the economy will shrink 1 percent this year, after contracting
3.7 percent in 2015. The situation has created “an atmosphere of
extreme nervousness,” Economy Minister Alexei Ulyukayev told President
Vladimir Putin in a meeting on Jan. 26, according to a transcript
released by the Kremlin.

Iran Cancels London Summit for New Oil Deals.Iran canceled a London conference to promote new contracts for global
oil companies, two weeks after economic sanctions were lifted, because
the British government hasn’t been able to issue visas for Iranians to
travel, an official told the weekly Iranian magazine Seda. The
ministry spent the past two years working on a new model contract, in
which fees paid to international companies will be linked to the oil
price and determined on a sliding scale, with riskier developments
paying more.

Birchbox Cuts 15% of Staff Amid Tech Startup Belt-Tightening. Birchbox Inc., a startup that sells subscriptions for personalized beauty samples,
said it’s cutting 15 percent of staff and suspending operations in
Canada. The cutbacks, which affect 45 people out of a staff of 300, are
the latest sign that technology startups are struggling to create
sustainable businesses as venture funding begins to cool. “The
cuts made today will allow us to reinvest in our biggest opportunities
and grow even more quickly in the future,” Birchbox co-founder and Chief
Executive Officer Katia Beauchamp said in a statement. "Our vision for
Birchbox has always been to build a standalone company, and today’s
market demands that we reach profitability this year."

Wall Street Journal:

Turkey Says Russia Violated Its Airspace Again. Turkey summons Russian envoy, issues warning to Moscow. Turkey said Saturday that a Russian warplane breached its airspace,
accusing Moscow of seeking to escalate tensions and warning of
consequences two months after Turkish F-16s downed a Russian jet for
violating its territory from Syria.

The U.S. Has No Global Strategy. The former defense
secretary on U.S. gains forfeited in Iraq, America’s rudderless foreign
policy and the ‘completely unrealistic’ Donald Trump. Many Americans probably had misgivings when U.S. troops were
withdrawn from Iraq in 2011, but even the most pessimistic must be
surprised at how quickly things went south. Turn on the TV news:
Western Iraq, including the Sunni triangle that the U.S. once worked so
hard to pacify, is in the hands of a terrorist group, Islamic...

Germany, Car Makers Near a Plan to Give Electric Vehicles a Boost. Heads of Volkswagen, BMW and Daimler to meet with Chancellor Merkel next week.
German Chancellor Angela Merkel’s government and the top brass of
car makers Volkswagen AG, BMW AG, and Daimler AG are nearing agreement
on a plan to charge up the country’s sluggish market for electric
vehicles by providing a combination of cash incentives and massive
expansion of charging stations.

Official: Some Clinton emails 'too damaging' to release. (video) The intelligence community has deemed some of Hillary Clinton’s
emails “too damaging" to national security to release under any
circumstances, according to a U.S. government official close to the
ongoing review. A second source, who was not authorized to speak on the
record, backed up the finding. The determination was first reported by Fox News,
hours before the State Department formally announced Friday that seven
email chains, found in 22 documents, will be withheld “in full” because
they, in fact, contain “Top Secret” information.

2016's "Biggest Risk": Markets Will "Need To Panic" To Wake Up "Impotent" Policymakers. In addition to the risk of a deeper profit recession,there is
no doubt the recent sell-off has been exacerbated by policy impotence;
the sense that policy-makers have little solution for global demand
deficiency. A weak, disjointed recovery may also be threatened
by the political shift toward capital controls in China, border controls
in Europe and the US, as well as more aggressive redistributive
taxation at a time of ongoing fiscal austerity.

RAY DALIO: The 75-year debt supercycle is coming to an end. He's worried that one of the fixed constants of economics — the ability
of central banks to stimulate economic growth through lowering the cost
of debt — is coming to an end. What I am contending is that there are limits to spending growth financed by a combination of debt and money. When these limits are reached, it marks the end of the upward phase of the long-term debt cycle.In 1935, this scenario was dubbed "pushing on a string."

Trump may not have done his homework in Iowa — and it could cost him. Trump could hand Ted Cruz or Marco Rubio a victory in Iowa because he
believes it when he says he could shoot someone right in the middle of
Fifth Avenue and not lose a single voter. That arrogance, which has fed
off his remarkable success in recent months, has convinced the New York
billionaire that he does not have to do the grunt work required of
lesser mortals who want to win the nation’s first election showdown –
and it might well do him in. Data points:

The positions and strategies discussed on BETWEEN THE HEDGES are offered for entertainment purposes only and are in no way intended to serve as personal investing advice. Readers should not make any investment decision without first conducting their own thorough due diligence. Readers should assume the editor of this blog holds a position in any securities discussed, recommended or panned. While the information provided is obtained from sources believed to be reliable, its accuracy or completeness cannot be guaranteed, nor can this publication be, in anyway, considered liable for the investment performance of any securities or strategies discussed.